If governments are aware that increases in the money supply cause inflation,do some countries increase the money supply by significant amounts anyway?

Asked on by soman2006

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brettd's profile pic

brettd | High School Teacher | (Level 2) Educator Emeritus

Posted on

Yes, but that doesn't mean it was a good idea or it turned out well for them.  The best recent examples of this course of action are in Africa and South America, where economies are notoriously unstable.  In Zimbabwe, for example, racked by civil strife and with an unpopular dictator for a President in Robert Mugabe, they experienced an economic collapse and a resulting budget crisis.  To keep the military loyal, Mugabe had to print more money and use that for the budget.  Inflation eventually reached a stunning 2 million percent, for that and other reasons.  He did this to maintain power, of course, and it worked, but his peoples' standard of living went through the floor.

This also happened to a lesser degree in Argentina and Brazil in recet decades, where the money supply rapidly increased to stave off short term economic collpase, but this provoked long term economic misery.

krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted on

Inflation, when considered by itself, is bad. But inflation is also a common side effect of economic development. All the developed and developing economies of the world have experiences inflation along with their economic growth. Therefore governments do take some action to increase money supply, being fully aware that it may put an inflationary pressure on the economy. Increasing money supply is one such action. Government take such action to stimulate expenditure and investment in the economy, which is a key to economic growth. However it must be remembered that too high inflation rate over an extended period is bad for an economy and it is best to avoid actions that cause such high and sustained inflation.

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